Activist resurgence in the US and Japan, 50% involving boardroom changes

10 Jun, 2020 12:00
source: Singularity Financial

Singularity Financial Hong Kong June 10, 2020 – The volume of activist campaigns worldwide dipped sharply in March and April, during the peak of the crisis, but May saw a slight resurgence with 16 campaigns and $3.3 billion of capital deployed.

Twice as many campaigns were initiated in May as in the previous month, while capital deployed was 159% higher than in March, report  from the investment bank Lazard revealed.

However, this remains below the pre-Covid monthly average for the six months up until February 2020, which saw a monthly average of 19 new campaigns and $4.6 billion of capital deployed.

Japan saw 16 campaigns initiated up to the end of May, compared to an average of six over the same period in the previous three years.

North America has also seen a resurgence after activist campaigns fell almost 30% in March and April, and is now just below pre-Covid levels.

Lazard Head of European Shareholder Advisory, Rich Thomas, told CNBC that the volume of investor activism was broadly following the markets, with the S&P 500 this week surpassing its pre-coronavirus levels for the first time, but said it remains a “different story” in Europe.

“In Europe, the decline was 60% from pre-Covid levels to post-Covid in March and April, and we have not seen any of that recovery yet,” he said.

“However, I don’t think that means that the European market and activism in Europe is forever changed. I think more important is that we look to what is happening in North America as that leading indicator of what is likely ahead of us in Europe.”

50% of activism campaigns involve boardroom changes

In the second quarter, so far, 50% of all campaigns by shareholder activists have involved attacks against boards or management teams, compared to a consistent 33% in the first quarter of 2020 and the whole of 2019.

The removal or replacement of top executives at European companies has become a more prominent demand since the onset of the coronavirus pandemic, according to a report from Lazard.

Recent activism examples include a campaign by TCI (The Children’s Investment Fund) to remove Wirecard CEO Markus Braun after a critical audit failed to answer questions about accounting practices, while easyJet founder Stelios Haji-Ioannou in April attempted to oust the airline’s CEO and Chairman. In March, Hugo Boss announced that its CEO Mark Langer will leave the managing Board following pressure from activist investor Bluebell Capital.

“Prior to the pandemic, I would have pointed to the rise of ‘handshake’ agreements whereby activists and companies make peace without formal settlements, the continued convergence of private equity and hedge fund activism as each side borrows tactics from the other, and the increasing prominence of environmental and social themes in activist campaigns.”

Shareholder activism director from Edelman Patrick Ryan shared his thought during recent roundtable discussion by Boardroom Intelligence. “Several coronavirus (COVID-19)-related developments are significantly impacting the activism landscape. Declining valuations are fueling a revival of takeover defence mechanisms like poison pills that had fallen out of favour.”

“Balance sheet activism has largely disappeared as companies prioritise preserving cash, and executive compensation is receiving renewed scrutiny. How long-lasting these trends will be is unclear and depends partly on the scale and duration of the pandemic’s economic consequences. We feel confident, however, that we will see a surge in activism as we did in 2009 once lockdowns lift and markets stabilize. Corrections tend to highlight underperformance and expose structurally deficient companies.” he added.

Settlements have become a significant part of the activism business model

What are some of the common factors driving activist campaigns? It is still to make the company more profitable. But there are different ways to pursue this goal.

Generally, this depends on the investment strategy of the activist shareholder. In particular, a distinction can be made between short-term and long-term investors. While short-term investors often try to yield higher dividend payments, long-term investors put their focus on strategic aims, such as divestment of certain business units, the expansion of business areas, and the restructuring of group structures, and so on. And there are groups of activist shareholders pursuing non-financial aims.

Settlements have become a significant part of the activism business model, with only a handful of full-fledged proxy fights each year. In part, settlements are attractive to activists because they can leverage lower percentages of ownership into less expensive, but still impactful agreements.

Through settlement, an activist generally obtains one to three board seats, which is within spitting distance of winning a short-slate proxy contest. Settlements have also opened the door for a variety of other options for activists to demand, including commitments to alter the mix of capital expenditures, governance changes, creation of special committees to review strategy, commitments for operating and financial goals, and interestingly, the influx of other professionals, such as consultants, into the boardroom.


The extent of COVID-19’s long-term impact on the economy and activism remains to be seen.

At least in the near future, shareholders will largely avoid balance sheet activism, and takeover defences such as poison pills, with reasonable terms, will enjoy increased acceptance from investors and proxy advisers.

As the economy begins to reopen, dissident shareholders will also likely look to hold boards and management teams accountable for perceived mismanagement or failed oversight during the pandemic.

Longer term, we expect certain pre-COVID-19 trends to continue. Environmental and social issues that now comprise a significant part of shareholder discourse will play an increasingly prominent role in activist campaigns. With several industries ripe for consolidation, we also expect M&A activism to remain strong.

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